The government argued that even though AT&T and Time Warner weren’t direct rivals, their combination would form an integrated giant with the power to force higher pay-TV prices.
Photo:
brendan mcdermid/Reuters

The U.S. Court of Appeals for the District of Columbia Circuit ruled unanimously that the Justice Department was “unpersuasive” in seeking to overturn a decision by U.S. District Judge
Richard Leon
last June that allowed the deal.

Judge Leon concluded that an AT&T-Time Warner combination was unlikely to harm competition, and a three-judge D.C. Circuit panel on Tuesday said the trial court “did not abuse its discretion” in reaching that conclusion.

The ruling sweeps away the legal uncertainty that has hung over AT&T as it has moved forward with the Time Warner assets. Though the telecommunications giant beat the Justice Department in a six-week trial last year, it had agreed to temporary rules, set to expire at the end of February, that would have made it easier to unwind the merger had the government appeal been successful.

Shortly after the decision Tuesday, Justice Department antitrust chief
Makan Delrahim
called AT&T’s general counsel,
David McAtee,
to congratulate him on the victory and inform him that the government wouldn’t take the case any further, according to a person familiar with the exchange.

“The merger of these innovative companies has already yielded significant consumer benefits, and it will continue to do so for years to come,” Mr. McAtee said in a written statement.

The decision cements one of the biggest losses for the Justice Department’s antitrust division in a generation. The Justice Department lawsuit, filed in November 2017, was the first major antitrust action under the Trump administration, and the case marked the first time in 40 years the government fully litigated a case challenging a so-called vertical merger that combined two companies that didn’t compete head-to-head.

Tuesday’s loss leaves Trump administration antitrust enforcement at a crossroads, and it could make the department less eager to bring a similarly ambitious lawsuit in the near future. Before the AT&T litigation, the Justice Department had enjoyed a winning streak in merger cases that lasted more than a decade, with each win building momentum and precedent for the next one.

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Antitrust observers are now watching closely to see whether the ruling affects the government’s willingness to challenge traditional horizontal mergers between major head-to-head competitors, such as
T-Mobile US Inc.
’s proposed acquisition of
Sprint Corp.
, a deal that remains under review at the Justice Department and the Federal Communications Commission.

“We are grateful that the Court of Appeals considered our objections to the District Court opinion,” a Justice Department spokesman said of Tuesday’s AT&T ruling. “The Department has no plans to seek further review.”

The government argued that even though AT&T and Time Warner weren’t direct rivals, their combination would form an integrated giant with the power to force higher pay-television prices.

The Justice Department’s principal theory focused on the fact that a postmerger AT&T would be both a leading pay-television service provider, including through its DirecTV subsidiary, and an owner of sought-after programming, via Time Warner’s portfolio, which included the Turner networks and HBO.

AT&T would be able to force rival pay-television systems to pay more for Turner networks such as TNT and CNN after the acquisition, the department argued. AT&T disputed the claim, saying that it wouldn’t have the leverage to raise prices because it would lose money if Turner didn’t appear widely on pay-television lineups around the U.S.

From day one, the Justice Department struggled in litigating its case, drawing repeated criticism from Judge Leon as he presided over the trial.

In his 172-page ruling, Judge Leon said a postmerger AT&T wasn’t likely to have anticompetitive leverage against its rivals or more muscle to force higher prices.

Justice Department officials continued to believe the lawsuit was justified, arguing Judge Leon ignored economics and common sense.

The D.C. Circuit, in siding with AT&T on Tuesday, credited Turner’s post-lawsuit pledge to arbitrate any fee disputes with rivals in case of an impasse. That part of the ruling could have broader ramifications because it highlighted that merger partners facing an antitrust challenge can potentially weaken the government’s case by making promises to limit or forgo pricing increases in the near term.

The court also said the marketplace was becoming more competitive, with streaming services such as Netflix and Hulu making inroads on traditional pay-television services such as AT&T’s.

The appeals court ruling wasn’t a full-throated endorsement of Judge Leon’s approach. The D.C. Circuit said that the trial judge “made some problematic statements, which the government identifies and this court cannot ignore.” But the panel said that none of Judge Leon’s possible errors were substantial enough to undermine his decision in AT&T’s favor.

The 34-page decision focused heavily on the particular facts of the case, and the panel said it wasn’t making new law that insulated vertical mergers from challenge. Such deals can create an array of harms other than higher prices, “including decreased product quality and reduced innovation,” the court said. But in the AT&T case, the Justice Department presented insufficient evidence to carry the day, it said.

AT&T has continued to question whether the department had political motivations for suing, in light of President Trump’s pledge as a candidate that he would block the deal if he won the White House.

The Justice Department denied that politics played any role. That issue wasn’t part of the case, as Judge Leon cut off the company’s ability to raise the matter.

After completing the Time Warner acquisition last summer, AT&T rebranded the assets as WarnerMedia.

The telecom giant is planning a WarnerMedia streaming service for later this year, and the unit’s initial performance for AT&T has been strong, in part because of box-office successes at the Warner Bros. studio division.

But there also have been challenges, including a continuing carriage dispute with
Dish Network
that has resulted in a blackout of HBO on the satellite service as well as Dish’s streaming product, Sling TV.

Dish was a critic of AT&T’s Time Warner acquisition and testified at trial for the Justice Department. The post-trial standoff marked the first time HBO has ever gone dark on a pay-television provider.

Dish blamed the merger for the blackout, while HBO accused Dish of being unreasonable, rejecting the claim that AT&T’s new ownership role caused the impasse.